What’s on the Estate Tax Horizon?

By James A. List
The Law Offices of James A. List, LLC

There was much speculation about what the current presidential administration was going to do about estate tax law changes in late 2008 into 2009.  Some of this has quieted down as the stimulus package, unemployment, the auto industry and AIG, and health care reform now dominate the headlines. However, 2010 is upon us and the debate will soon again heat up, so it’s best to stay on top of the issues.

Here’s what we know: The Economic Recovery Act of 2001 says the amount that each individual could exempt from Federal Estate Taxation increased from $600,000 to $3.5 million through 2009. The tax rate on amounts more than the exemption gradually dropped from 50 percent to 45 percent. In 2010, federal estate taxes end, but they return with a vengeance in 2011 with a $1 million exemption and a 55 percent estate tax rate on the balance more than $1 million.

This was intentional. The 2001 Act passed during a time of budget surplus and before the dot- com crash. The act required the government to revisit estate taxes to avoid the penalties of no estate tax revenues in 2010 and significant estate tax payments from estates in 2011.

President Obama did not speak much about federal estate taxes during the campaign, and he has focused on other issues since his term began. The president’s message is consistent, though: He has advocated that the 2009 exemption remain at $3.5 million – indexed for inflation – with a tax rate of 45 percent on the excess estate. He also favors exemption portability, which would allow a spouse to use the unused portion of their deceased spouse’s exemption. This would eliminate the need for bypass trusts and retitling of assets between spouses. The president also advocates the retention of the stepped-up basis provisions.

Both parties in Congress also have introduced several estate tax bills. While there is disagreement about the exemption amount and the estate tax rates, most bills have favored portability, the reunification of the gift tax with the estate tax, and the retention of the stepped-up basis. With the present state of the economy and the projections on the deficit, it is difficult to predict the final numbers when legislation is adopted.

Hopefully, the final legislation will clearly spell out these provisions. The most important things are clarity and predictability. Estate planners need a clear understanding of the law without the necessity of judicial interpretation. And our clients need predictability – how does one do estate tax planning when the exemptions and rates change so often?

These issues need to be addressed at the state level as well. Maryland’s current exemption is $1 million, with a variable estate tax rate that can reach 16 percent. This lack of consistency and coordination between the federal and state approach is another challenge in planning one’s estate.

I would love to hear your concerns about these issues with your federal and state elected officials. Please contact me at jalist@jalistlaw.com or 410.337.5340, or post a comment to the blog.

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